Cost Accounting A Managerial Emphasis 14e Charles T. Horngren Solutions Manual Test Bank SM Ch01

Cost Accounting A Managerial Emphasis 14e Charles T. Horngren Solutions Manual Test Bank

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SM Ch01

Chapter 1 The Manager and Management Accounting

1-1 How does management accounting differ from financial accounting?

1-2 “Management accounting should not fit the straitjacket of financial accounting.” Explain and give an example.

1-3 How can a management accountant help formulate strategy?

1-4 Describe the business functions in the value chain.

1-5 Explain the term “supply chain” and its importance to cost management.

1-6 “Management accounting deals only with costs.” Do you agree? Explain.

1-7 How can management accountants help improve quality and achieve timely product deliveries?

1-8 Describe the five-step decision-making process.

1-9 Distinguish planning decisions from control decisions.

1-10 What three guidelines help management accountants provide the most value to managers?

1-11 “Knowledge of technical issues such as computer technology is a necessary but not sufficient condition to becoming a successful management accountant.” Do you agree? Why?

1-12 As a new controller, reply to this comment by a plant manager: “As I see it, our accountants may be needed to keep records for shareholders and Uncle Sam, but I don’t want them sticking their noses in my day-to-day operations. I do the best I know how. No bean counter knows enough about my responsibilities to be of any use to me.”

1-13 Where does the management accounting function fit into an organization’s structure?

1-14 Name the four areas in which standards of ethical conduct exist for management accountants in the United States. What organization sets forth these standards?

1-15 What steps should a management accountant take if established written policies provide insufficient guidance on how to handle an ethical conflict?

1-16 Value chain and classification of costs, computer company. Compaq Computer incurs the following costs:
a. Electricity costs for the plant assembling the Presario computer line of products
b. Transportation costs for shipping the Presario line of products to a retail chain
c. Payment to David Kelley Designs for design of the Armada Notebook
d. Salary of computer scientist working on the next generation of minicomputers
e. Cost of Compaq employees’ visit to a major customer to demonstrate Compaq’s ability to interconnect with other computers
f. Purchase of competitors’ products for testing against potential Compaq products
g. Payment to television network for running Compaq advertisements
h. Cost of cables purchased from outside supplier to be used with Compaq printers
Required Classify each of the cost items (a–h) into one of the business functions of the value chain shown in
Exhibit 1-2 (p. 6).

1-17 Value chain and classification of costs, pharmaceutical company. Merck, a pharmaceutical company, incurs the following costs:
a. Cost of redesigning blister packs to make drug containers more tamperproof
b. Cost of videos sent to doctors to promote sales of a new drug
c. Cost of a toll-free telephone line used for customer inquiries about drug usage, side effects of drugs, and so on
d. Equipment purchased to conduct experiments on drugs yet to be approved by the government
e. Payment to actors for a television infomercial promoting a new hair-growth product for balding men
f. Labor costs of workers in the packaging area of a production facility
g. Bonus paid to a salesperson for exceeding a monthly sales quota
h. Cost of Federal Express courier service to deliver drugs to hospitals
Required Classify each of the cost items (a–h) as one of the business functions of the value chain shown in
Exhibit 1-2 (p. 6).

1-18 Value chain and classification of costs, fast food restaurant. Burger King, a hamburger fast food restaurant, incurs the following costs:
a. Cost of oil for the deep fryer
b. Wages of the counter help who give customers the food they order
c. Cost of the costume for the King on the Burger King television commercials
d. Cost of children’s toys given away free with kids’ meals
e. Cost of the posters indicating the special “two cheeseburgers for $2.50”
f. Costs of frozen onion rings and French fries
g. Salaries of the food specialists who create new sandwiches for the restaurant chain
h. Cost of “to-go” bags requested by customers who could not finish their meals in the restaurant

Classify each of the cost items (a–h) as one of the business functions of the value chain shown in Required
Exhibit 1-2 (p. 6).

1-19 Key success factors. Grey Brothers Consulting has issued a report recommending changes for its newest manufacturing client, Energy Motors. Energy Motors currently manufactures a single product, which is sold and distributed nationally. The report contains the following suggestions for enhancing business performance:
a. Add a new product line to increase total revenue and to reduce the company’s overall risk.
b. Increase training hours of assembly line personnel to decrease the currently high volumes of scrap and waste.
c. Reduce lead times (time from customer order of product to customer receipt of product) by 20% in order to increase customer retention.
d. Reduce the time required to set up machines for each new order.
e. Benchmark the company’s gross margin percentages against its major competitors.
Link each of these changes to the key success factors that are important to managers. Required

1-20 Planning and control decisions. Conner Company makes and sells brooms and mops. It takes the following actions, not necessarily in the order given. For each action (a–e) state whether it is a planning decision or a control decision.
a. Conner asks its marketing team to consider ways to get back market share from its newest competitor,
b. Conner calculates market share after introducing its newest product.
c. Conner compares costs it actually incurred with costs it expected to incur for the production of the new product.
d. Conner’s design team proposes a new product to compete directly with the Swiffer.
e. Conner estimates the costs it will incur to sell 30,000 units of the new product in the first quarter of next fiscal year.

1-21 Five-step decision-making process, manufacturing. Garnicki Foods makes frozen dinners that it sells through grocery stores. Typical products include turkey dinners, pot roast, fried chicken, and meat loaf.
The managers at Garnicki have recently introduced a line of frozen chicken pies. They take the following actions with regard to this decision.
a. Garnicki performs a taste test at the local shopping mall to see if consumers like the taste of its proposed new chicken pie product.
b. Garnicki sales managers estimate they will sell more meat pies in their northern sales territory than in their southern sales territory.
c. Garnicki managers discuss the possibility of introducing a new chicken pie.
d. Garnicki managers compare actual costs of making chicken pies with their budgeted costs.
e. Costs for making chicken pies are budgeted.
f. Garnicki decides to introduce a new chicken pie.
g. To help decide whether to introduce a new chicken pie, the purchasing manager calls a supplier to check the prices of chicken.
Classify each of the actions (a–g) as a step in the five-step decision-making process (identify the problem and Required uncertainties, obtain information, make predictions about the future, choose among alternatives, implement the decision, evaluate performance, and learn). The actions are not listed in the order they are performed.

1-22 Five-step decision-making process, service firm. Brite Exteriors is a firm that provides house painting services. Robert Brite, the owner, is trying to find new ways to increase revenues. Mr. Brite performs the following actions, not in the order listed.
a. Mr. Brite calls Home Depot to ask the price of paint sprayers.
b. Mr. Brite discusses with his employees the possibility of using paint sprayers instead of hand painting to increase productivity and thus revenues.
c. The workers who are not familiar with paint sprayers take more time to finish a job than they did when painting by hand.
d. Mr. Brite compares the expected cost of buying sprayers to the expected cost of hiring more workers who paint by hand, and estimates profits from both alternatives.
e. The project scheduling manager confirms that demand for house painting services has increased.
f. Mr. Brite decides to buy the paint sprayers rather than hire additional painters.
Classify each of the actions (a-f) according to its step in the five-step decision-making process (identify the Required problem and uncertainties, obtain information, make predictions about the future, choose among alternatives, implement the decision, evaluate performance, and learn).

1-23 Professional ethics and reporting division performance. Marcia Miller is division controller and
Tom Maloney is division manager of the Ramses Shoe Company. Miller has line responsibility to Maloney, but she also has staff responsibility to the company controller.
Maloney is under severe pressure to achieve the budgeted division income for the year. He has asked
Miller to book $200,000 of revenues on December 31. The customers’ orders are firm, but the shoes are still in the production process. They will be shipped on or around January 4. Maloney says to Miller, “The key event is getting the sales order, not shipping the shoes. You should support me, not obstruct my reaching division goals.” 
Required 1. Describe Miller’s ethical responsibilities. 2. What should Miller do if Maloney gives her a direct order to book the sales?   Problems

1-24 Planning and control decisions, Internet company. offers its subscribers several services, such as an annotated TV guide and local-area information on weather, restaurants, and movie theaters. Its main revenue sources are fees for banner advertisements and fees from subscribers. Recent data are as follows:
Month/Year Advertising Revenues Actual Number of Subscribers Monthly Fee Per Subscriber
June 2009 $ 415,972 29,745 $15.50
December 2009 867,246 55,223 20.50
June 2010 892,134 59,641 20.50
December 2010 1,517,950 87,674 20.50
June 2011 2,976,538 147,921 20.50
The following decisions were made from June through October 2011:
a. June 2011: Raised subscription fee to $25.50 per month from July 2011 onward. The budgeted number of subscribers for this monthly fee is shown in the following table.
b. June 2011: Informed existing subscribers that from July onward, monthly fee would be $25.50.
c. July 2011: Offered e-mail service to subscribers and upgraded other online services.
d. October 2011: Dismissed the vice president of marketing after significant slowdown in subscribers and subscription revenues, based on July through September 2011 data in the following table.
e. October 2011: Reduced subscription fee to $22.50 per month from November 2011 onward.
Results for July–September 2011 are as follows: 
Budgeted Number of
A ctual Number of
Subscribers Monthly Fee per Subscriber
July 2011 145,000 129,250 $25.50
A ugust 2011 155,000 142,726 25.50
September 2011 165,000 145,643 25.50   1. Classify each of the decisions (a–e) as a planning or a control decision. 2. Give two examples of other planning decisions and two examples of other control decisions that may be made at

1-25 Strategic decisions and management accounting. A series of independent situations in which a firm is about to make a strategic decision follow.
a. Roger Phones is about to decide whether to launch production and sale of a cell phone with standard features.
b. Computer Magic is trying to decide whether to produce and sell a new home computer software package that includes the ability to interface with a sewing machine and a vacuum cleaner. There is no such software currently on the market.
c. Christina Cosmetics has been asked to provide a “store brand” lip gloss that will be sold at discount retail stores.
d. Marcus Meats is entertaining the idea of developing a special line of gourmet bologna made with sun dried tomatoes, pine nuts, and artichoke hearts.  1. For each decision, state whether the company is following a low price or a differentiated product strategy. Required 2. For each decision, discuss what information the management accountant can provide about the source of competitive advantage for these firms.

1-26 Management accounting guidelines. For each of the following items, identify which of the management accounting guidelines applies: cost-benefit approach, behavioral and technical considerations, or different costs for different purposes. 1. Analyzing whether to keep the billing function within an organization or outsource it 2. Deciding to give bonuses for superior performance to the employees in a Japanese subsidiary and extra vacation time to the employees in a Swedish subsidiary 3. Including costs of all the value-chain functions before deciding to launch a new product, but including only its manufacturing costs in determining its inventory valuation 4. Considering the desirability of hiring one more salesperson 5. Giving each salesperson the compensation option of choosing either a low salary and a high-percentage sales commission or a high salary and a low-percentage sales commission 6. Selecting the costlier computer system after considering two systems 7. Installing a participatory budgeting system in which managers set their own performance targets, instead of top management imposing performance targets on managers 8. Recording research costs as an expense for financial reporting purposes (as required by U.S.
GAAP) but capitalizing and expensing them over a longer period for management performanceevaluation purposes 9. Introducing a profit-sharing plan for employees

1-27 Role of controller, role of chief financial officer. George Perez is the controller at Allied Electronics, a manufacturer of devices for the computer industry. He is being considered for a promotion to chief financial officer. 1. In this table, indicate which executive is primarily responsible for each activity. Required
ctivity Controller CFO
Managing accounts payable
Communicating with investors
Strategic review of different lines of businesses
Budgeting funds for a plant upgrade
Managing the company’s short-term investments
Negotiating fees with auditors
A ssessing profitability of various products
Evaluating the costs and benefits of a new product design 2. Based on this table and your understanding of the two roles, what types of training or experiences will
George find most useful for the CFO position?

1-28 Pharmaceutical company, budgeting, ethics. Eric Johnson was recently promoted to Controller of Research and Development (R&D) for PharmaCor, a Fortune 500 pharmaceutical company, which manufactures prescription drugs and nutritional supplements. The company’s total R&D cost for 2012 was expected (budgeted) to be $5 billion. During the company’s mid-year budget review, Eric realized that current R&D expenditures were already at $3.5 billion, nearly 40% above the mid-year target. At this current rate of expenditure, the R&D division was on track to exceed its total year-end budget by $2 billion!
In a meeting with CFO, James Clark, later that day, Johnson delivered the bad news. Clark was both shocked and outraged that the R&D spending had gotten out of control. Clark wasn’t any more understanding when Johnson revealed that the excess cost was entirely related to research and development of a new drug, Lyricon, which was expected to go to market next year. The new drug would result in large profits for PharmaCor, if the product could be approved by year-end.
Clark had already announced his expectations of third quarter earnings to Wall Street analysts. If the R&D expenditures weren’t reduced by the end of the third quarter, Clark was certain that the targets he had announced publicly would be missed and the company’s stock price would tumble. Clark instructed Johnson to make up the budget short-fall by the end of the third quarter using “whatever means necessary.”
Johnson came up with the following ideas for making the third quarter budgeted targets:
a. Stop all research and development efforts on the drug Lyricon until after year-end. This change would delay the drug going to market by at least six months. It is also possible that in the meantime a PharmaCor competitor could make it to market with a similar drug.
b. Sell off rights to the drug, Markapro. The company had not planned on doing this because, under current market conditions, it would get less than fair value. It would, however, result in a onetime gain that could offset the budget short-fall. Of course, all future profits from Markapro would be lost.
c. Capitalize some of the company’s R&D expenditures reducing R&D expense on the income statement.
This transaction would not be in accordance with GAAP, but Johnson thought it was justifiable, since the Lyricon drug was going to market early next year. Johnson would argue that capitalizing R & D costs this year and expensing them next year would better match revenues and expenses.
1. Referring to the “Standards of Ethical Behavior for Practitioners of Management Accounting and
Financial Management,” Exhibit 1-7 on page 16, which of the preceding items (a–c) are acceptable to use? Which are unacceptable? 2. What would you recommend Johnson do?

1-29 Professional ethics and end-of-year actions. Janet Taylor is the new division controller of the snack-foods division of Gourmet Foods. Gourmet Foods has reported a minimum 15% growth in annual earnings for each of the past five years. The snack-foods division has reported annual earnings growth of more than 20% each year in this same period. During the current year, the economy went into a recession. The corporate controller estimates a 10% annual earnings growth rate for Gourmet Foods this year. One month before the December 31 fiscal year-end of the current year, Taylor estimates the snack-foods division will report an annual earnings growth of only 8%. Warren Ryan, the snack-foods division president, is not happy, but he notes that “the end-of-year actions” still need to be taken.
Taylor makes some inquiries and is able to compile the following list of end-of-year actions that were more or less accepted by the previous division controller:
a. Deferring December’s routine monthly maintenance on packaging equipment by an independent contractor until January of next year
b. Extending the close of the current fiscal year beyond December 31 so that some sales of next year are included in the current year
c. Altering dates of shipping documents of next January’s sales to record them as sales in December of the current year
d. Giving salespeople a double bonus to exceed December sales targets
e. Deferring the current period’s advertising by reducing the number of television spots run in December and running more than planned in January of next year
f. Deferring the current period’s reported advertising costs by having Gourmet Foods’ outside advertising agency delay billing December advertisements until January of next year or by having the agency alter invoices to conceal the December date
g. Persuading carriers to accept merchandise for shipment in December of the current year although they normally would not have done so
1. Why might the snack-foods division president want to take these end-of-year actions? 2. Taylor is deeply troubled and reads the “Standards of Ethical Behavior for Practitioners of Management
A ccounting and Financial Management” in Exhibit 1-7 (p. 16). Classify each of the end-of-year actions (a–g) as acceptable or unacceptable according to that document. 3. What should Taylor do if Ryan suggests that these end-of-year actions are taken in every division of
Gourmet Foods and that she will greatly harm the snack-foods division if she does not cooperate and paint the rosiest picture possible of the division’s results?

1-30 Professional ethics and end-of-year actions. Deacon Publishing House is a publishing company that produces consumer magazines. The house and home division, which sells home-improvement and home-decorating magazines, has seen a 20% reduction in operating income over the past nine months, primarily due to the recent economic recession and the depressed consumer housing market. The division’s
Controller, Todd Allen, has felt pressure from the CFO to improve his division’s operating results by the end of the year. Allen is considering the following options for improving the division’s performance by year-end:
a. Cancelling two of the division’s least profitable magazines, resulting in the layoff of twenty-five employees.
b. Selling the new printing equipment that was purchased in January and replacing it with discarded equipment from one of the company’s other divisions. The previously discarded equipment no longer meets current safety standards.
c. Recognizing unearned subscription revenue (cash received in advance for magazines that will be delivered in the future) as revenue when cash is received in the current month (just before fiscal year end) instead of showing it as a liability.
d. Reducing the division’s Allowance for Bad Debt Expense. This transaction alone would increase operating income by 5%.
e. Recognizing advertising revenues that relate to January in December.
f. Switching from declining balance to straight line depreciation to reduce depreciation expense in the current year. 1. What are the motivations for Allen to improve the division’s year-end operating earnings? Required 2. From the point of view of the “Standards of Ethical Behavior for Practitioners of Management
A ccounting and Financial Management,” Exhibit 1-7 on page 16, which of the preceding items (a–f) are acceptable? Which are unacceptable? 3. What should Allen do about the pressure to improve performance?
Collaborative Learning Problem

1-31 Global company, ethical challenges. Bredahl Logistics, a U.S. shipping company, has just begun distributing goods across the Atlantic to Norway. The company began operations in 2010, transporting goods to
South America. The company’s earnings are currently trailing behind its competitors and Bredahl’s investors are becoming anxious. Some of the company’s largest investors are even talking of selling their interest in the shipping newcomer. Bredahl’s CEO, Marcus Hamsen, calls an emergency meeting with his executive team.
Hamsen needs a plan before his upcoming conference call with uneasy investors. Brehdal’s executive staff make the following suggestions for salvaging the company’s short-term operating results:
a. Stop all transatlantic shipping efforts. The start-up costs for the new operations are hurting current profit margins.
b. Make deep cuts in pricing through the end of the year to generate additional revenue.
c. Pressure current customers to take early delivery of goods before the end of the year so that more revenue can be reported in this year’s financial statements.
d. Sell-off distribution equipment prior to year-end. The sale would result in one-time gains that could offset the company’s lagging profits. The owned equipment could be replaced with leased equipment at a lower cost in the current year.
e. Record executive year-end bonus compensation for the current year in the next year when it is paid after the December fiscal year-end.
f. Recognize sales revenues on orders received, but not shipped as of the end of the year.
g. Establish corporate headquarters in Ireland before the end of the year, lowering the company’s corporate tax rate from 28% to 12.5%.

1. As the management accountant for Brehdahl, evaluate each of the preceding items (a–g) in the con- Required text of the “Standards of Ethical Behavior for Practitioners of Management Accounting and Financial
Management,” Exhibit 1-7 on page 16. Which of the items are in violation of these ethics standards and which are acceptable?

2. What should the management accountant do with respect to those items that are in violation of the ethical standards for management accountants?